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It’s real, it’s global, it can’t be stopped and it can be good or bad.
It is inflation.
I had someone tell me recently that U.S. annual inflation has been 10% for the last several years. That is not true of course although it may feel like it to some people.
My guaranteed income is a pension and Social Security. There is no COLA on my pension. Since I retired in 2010, the buying power on the great majority of my income has eroded by 43%. Most Americans are similarly affected or worse.
Not a day goes by I don’t read about inflation in my retirement Facebook groups or hear from a fellow retiree complaining about the size of the next expected Social Security COLA. “Absurd” at 2.5 % one women told me. “They fudge the numbers,” another retiree said.
A few of my fellow retirees still hold out the hope our former employer will give a COLA – it never will. I arranged for seven ad hoc COLAs over my years in employee benefits, but that was before there was a 401k plan with employer match in addition to the pension. To this day I don’t think most of my fellow retirees see the connection – in effect a COLA was paid by the company in advance.
I recall decades ago in seminars telling employees planning to retire that longevity was their greatest risk in retirement. Well, this is what – in part – that looks like – the impact of compounding inflation.
It must be worse for those who retired early in their fifties.
The history of inflation is no secret, it goes up and down, extreme highs and lows, but it always keeps chugging along. It’s like reverse investment compounding.
Nevertheless, when it comes to retirement, it seems largely to be ignored and we feign surprise when our buying power ain’t what it used to be.
Use any retirement planning tool and you are asked for an inflation assumption, but how many Americans take the trouble or if they do, use realistic assumptions? I didn’t, I used a different approach I dare not mention again, but even my strategy hasn’t been totally sufficient and I’m glad I have a backup when needed in the form of interest and dividend investment income.
The 4% withdrawal strategy includes a inflation adjustment and SS has a COLA as do most public employee pensions, but that leaves a lot of people on their own.
How are you or do you plan to cope with inflation in retirement? Have you hedged your bet?
Suppose you were going to retire and among your investments you had $190k in some kind of tax deferred account. You could purchase an annuity without inflation protection and get something around $700/mo on a joint and survivor annuity. Over the next 16 years you would collect a total of around $135,000. With a 2% inflation rider your initial payment would be less, but your total collected might be more.
Alternatively, you could do what we did when my spouse inherited the same amount of money in 2007. She left it in the IRA and began withdrawals in 2008 on a 23.5 year life expectancy. These funds were invested 80% in US stock index funds, and the balance in US bond index funds. In the first year she received $8119. Over the rest of the time since then she has collected over $200,000. She still has 8.4 years of life expectancy left on the IRS table. The current balance in the account is over $209,000. Every year her withdrawals have increased now to the mid-$20k range. The return from this account has crushed inflation.
To deal with inflation, you need some funds invested in the stock market earning market average returns. You have to have faith in the US economy. You don’t need all your funds in the market, just some….you cannot beat inflation without accepting some risk….
And you have to hope you don’t run into an extended bear market or some international crisis. It works when it works as long as you are good with the risk which you seem to be. 👍
I started my career in the early 1970s. My first mortgage had a double-digit interest rate, I can’t remember the exact figure. I was well aware of the effects of inflation and took it into account when I stopped working full time in 2000 at age 51. Because of some semi-lucky investments, I had over $1,000,000 at the time and a lifestyle where I didn’t spend much.
I worked a part time job for 20 years after that, much longer than any of my “real” jobs. I invested mostly in stock index funds. I started Social Security at my FRA of 66.
I’ve always assumed that my investments would earn 0% when adjusted for inflation, the reality has been much better than that. I’m 75 now and, despite depending on my investments for about half of my income, their value now, adjusted for inflation, is close to the same as it was in 2000 when I stopped working full time.